{"id":1075,"date":"2011-02-14T10:19:01","date_gmt":"2011-02-14T15:19:01","guid":{"rendered":"http:\/\/www.billlosey.com\/?p=1075"},"modified":"2011-02-14T10:19:01","modified_gmt":"2011-02-14T15:19:01","slug":"bye-bye-fannie-freddie","status":"publish","type":"post","link":"https:\/\/billlosey.com\/knowledge-center\/bye-bye-fannie-freddie\/","title":{"rendered":"Bye Bye Fannie &#038; Freddie?"},"content":{"rendered":"<p><strong>A fundamental reform for the housing market.<\/strong> For two-and-a-half years, economists and housing industry analysts have  wondered what would happen with Fannie Mae and Freddie Mac. On February  11, they got an answer: the Obama administration announced plans to  shut down both of the troubled mortgage giants by 2018 or sooner.<\/p>\n<p>As he met with the press, Treasury Secretary Timothy Geithner cited the \u201cvery  broad consensus\u201d that the government should play \u201ca much smaller role\u201d  in the housing market. Capitol Hill Republicans would agree, pointing to  the $154 billion price tag for the 2008 bailout of both firms. (That is  the Treasury\u2019s estimate.)<\/p>\n<p><strong>The choices on the table.<\/strong> The Obama administration\u2019s white paper offers three proposals to Congress, with the hope of legislation emerging by 2014.<\/p>\n<ul>\n<li><strong>Option 1.<\/strong> The government walks away from the mortgage market except for the FHA,  VHA and a few other programs designed to help low-income and  moderate-income homebuyers.<\/li>\n<li><strong>Option 2.<\/strong> The government  offers a kind of downside protection. In addition to backing home loans  via the entities mentioned in Option 1, it would also provide  \u201creinsurance\u201d to guarantee private mortgages in the event of a real  estate downturn and\/or recession. But the guarantee would only apply in a  crisis.<strong><\/strong><\/li>\n<li><strong>Option 3. <\/strong>A variation of Option 2 that would provide a \u201creinsurance\u201d backstop  for a range of mortgage investments already guaranteed by private  insurers. The \u201creinsurance\u201d would take effect if a private insurer  couldn&#8217;t pay (i.e., if its shareholders were wiped out).<\/li>\n<\/ul>\n<p><strong>The timeline.<\/strong> The  Obama administration may be long gone by the time all this plays out,  but here is the three-stage conception of how it will wind down both  agencies.<\/p>\n<ul>\n<li><strong>Stage 1.<\/strong> Between now and 2014, the government gradually reduces its subsidy for  the housing market. The conforming loan limit for Fannie and Freddie \u2013  now $729,000 in some metro areas \u2013 is scheduled to shrink to $625,000 in  October. In addition, Fannie and Freddie would start to require 10%  down for all loans and fees would rise for the government guarantee.<\/li>\n<li><strong>Stage 2.<\/strong> Starting around 2013-2014, the federal government will \u201caccelerate  the pace of transition\u201d (in Geithner\u2019s words) to a mortgage market  based in private capital with government intervention occurring only as  needed.<\/li>\n<li><strong>Stage 3.<\/strong> This stage depends on Congress. The idea is that by the middle of this  decade, legislation emerges spelling out Option 1, Option 2 or Option 3  above in detail and a new law is passed.<\/li>\n<\/ul>\n<p><strong>The big picture.<\/strong> By the end of this decade, it could be considerably harder to buy a  home. If the government gets out of the mortgage market (or at least  drastically reduces its role), a major influx of private capital needs to flow into the housing system to replace the federal subsidy, with the following possible effects:<\/p>\n<ul>\n<li>A  30-year fixed rate mortgage could become significantly more expensive.  How much more expensive? In early February, Credit Suisse projected that  interest rates on a basic 30-year FRM could rise by up to 2% if Fannie  and Freddie disappeared.<\/li>\n<li>If  the Option 1 scenario occurs, you could see considerably fewer FRMs and  more ARMs. In fact, you would likely see fewer fixed-rate mortgages if  Options 2 or 3 were chosen by Congress.<\/li>\n<li>Big banks could grab a bigger chunk of the mortgage market.<\/li>\n<li>Higher mortgage rates could negatively impact home sales &#8211; and in turn, home prices.<\/li>\n<\/ul>\n<p>We\u2019ll have to wait and see how this all plays out, all while hoping it won\u2019t lead to a decline in home ownership.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A fundamental reform for the housing market. For two-and-a-half years, economists and housing industry analysts have wondered what would happen with Fannie Mae and Freddie Mac. On February 11, they got an answer: the Obama administration announced plans to shut [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18],"tags":[],"class_list":["post-1075","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/1075","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/comments?post=1075"}],"version-history":[{"count":0,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/1075\/revisions"}],"wp:attachment":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/media?parent=1075"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/categories?post=1075"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/tags?post=1075"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}